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External Debt, Capital Flight and Political Risk

Author

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  • Alesina, Alberto F
  • Tabellini, Guido

Abstract

This paper provides an explanation of the simultaneous occurrence in developing countries of a large accumulation of external debt, private capital outflows and relatively low domestic capital formation. We consider a general equilibrium model in which two types of government with conflicting distributional goals randomly alternate in office. Uncertainty over the fiscal policies of future governments generates private capital flight and reduced domestic investment. This political uncertainty also provides the incentives for the current government to over-accumulate external debt. The model also predicts that left-wing governments are more inclined to impose restrictions on capital outflows than right-wing governments. Finally, we examine how political uncertainty affects the risk premium charged by lenders and how debt repudiation may occur after a change of political regime.

Suggested Citation

  • Alesina, Alberto F & Tabellini, Guido, 1988. "External Debt, Capital Flight and Political Risk," CEPR Discussion Papers 253, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:253
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    References listed on IDEAS

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    1. Eaton, Jonathan, 1987. "Public Debt Guarantees and Private Capital Flight," World Bank Economic Review, World Bank Group, vol. 1(3), pages 377-395, May.
    2. Jeffrey Sachs & Daniel Cohen, 1982. "LDC Borrowing with Default Risk," NBER Working Papers 0925, National Bureau of Economic Research, Inc.
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    4. Robert E. Cumby & Richard M. Levich, 1987. "On the Definition and Magnitude of Recent Capital Flight," NBER Working Papers 2275, National Bureau of Economic Research, Inc.
    5. Joshua Aizenman, 1987. "Investment, Openness, and Country Risk," NBER Working Papers 2410, National Bureau of Economic Research, Inc.
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    7. Jonathan Eaton & Mark Gersovitz, 1987. "Country Risk and the Organization of International Capital Transfer," NBER Working Papers 2204, National Bureau of Economic Research, Inc.
    8. Rudiger Dornbusch, 1989. "Debt Problems and the World Macroeconomy," NBER Chapters,in: Developing Country Debt and Economic Performance, Volume 1: The International Financial System, pages 331-358 National Bureau of Economic Research, Inc.
    9. Berg, Andrew & Sachs, Jeffrey, 1988. "The debt crisis structural explanations of country performance," Journal of Development Economics, Elsevier, vol. 29(3), pages 271-306, November.
    10. Alain Ize & Guillermo Ortiz, 1987. "Fiscal Rigidities, Public Debt, and Capital Flight," IMF Staff Papers, Palgrave Macmillan, vol. 34(2), pages 311-332, June.
    11. Alberto Alesina, 1987. "A Positive Theory of Fiscal Deficits and Government Debt in a Democracy," UCLA Economics Working Papers 435, UCLA Department of Economics.
    12. Sebastian Edwards, 1989. "Structural Adjustment Policies in Highly Indebted Countries," NBER Chapters,in: Developing Country Debt and the World Economy, pages 249-262 National Bureau of Economic Research, Inc.
    13. Rudiger Dornbusch & Juan Carlos de Pablo, 1987. "Argentina: Debt and Macroeconomic Instability," NBER Working Papers 2378, National Bureau of Economic Research, Inc.
    14. Fischer, Stanley, 1980. "Dynamic inconsistency, cooperation and the benevolent dissembling government," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 93-107, May.
    15. Alesina, Alberto, 1988. "Credibility and Policy Convergence in a Two-Party System with Rational Voters," American Economic Review, American Economic Association, vol. 78(4), pages 796-805, September.
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